(Readers: Please note the blog about the 5th revolution in the US is constructed as a story. While not all chapters are linked, the story might be more meaningful by starting at the beginning.)

(Want a PDF version for Entries #1-10, #11-20, #21-30 formatted for tablets and e-books?  Entries #31-40 available soon.  Click links for download.  America’s 5th Revolution Volume I (Entries 1-10)America’s 5th Revolution Volume II (Entries 11-20)America’s 5th Revolution Volume III (Entries 21-30)

Scene: Jordan’s office with Matt, reporter asked by POTUS to help Jordan write story why GM was so successful and why it failed.  Report will be used as part of effort to rebuild US-based manufacturing.

Jordan:  “First bit of trivia.  Matt, how many times has GM gone bankrupt?

reporter on typewriter clipartMatt:  “One that I know of – 2009.  That’s when the Feds put in a lot of cash and got a lot of stock in return.  People started calling it Government Motors.”

Jordan:  “A lot of people thought the Feds should have let GM die.  Doing so would have been a huge mistake.  We can discuss why in another session…but not today.”

Matt:  “OK, I give.  How many times has GM gone BK, or bankrupt?”

Jordan:  “Three.  2009, then twice before 1920.  The first was about 1909 and the second about 1919.  We need to get exact dates but close enough for now.”

Matt:  “Three times.  That’s a surprise.”

Jordan:  “And they might survive all three.”

Matt:  “What happened in 1909 and 1919?”

Jordan:  “The short version is this.  Rapid expansion of production and rapid sales growth without proper financial controls.  The result was the deadly sin – running out of cash.”

Matt:  “So unlike 2009 when demand was weak, the other two times demand was strong.  But GM expanded too quickly…really beyond their ability to raise enough cash to finance the growth.”

Jordan:  “Yes.  And that reminds me of my first day in finance at MIT.”

Matt:  “Alright.  First day of finance class.  What happened?”

CashJordan:  “The professor begins the class by saying, ‘Ladies and gentlemen, if you learn nothing else the entire time you are at this esteemed institution, I want you to remember one thing.  It does not matter whether your income statement indicates you made money or lost money.  The only thing that matters is…never run out of cash.’”

Matt:  “Well, GM management apparently didn’t go to that class.”

Jordan:  “A lot of people seemed to have skipped that class…a hundred years ago and now.”

Matt:  “OK, GM goes BK.  But in 1919 there is no government bailout.  Who bailed them out?”

Jordan:  “My view is the second BK and the bailout is the beginning of the GM juggernaut.  The bailout is from the DuPont family.  DuPont’s, already an investor, put in a boatload of cash and end up with a boatload more shares – 30-35% ownership.”

Matt:  “Anything else happen?”

APSJordan:  “The cornerstone for GM’s future success.  Pierre DuPont, chairman of the Board, installs Alfred P. Sloan as president.”

Matt:  “Is that the same Sloan as Sloan-Kettering Hospital in NY…and the Sloan School at MIT?”

Jordan:  “The same Alfred Pritchard Sloan.  Sloan was an MIT grad.  And I think he implemented three major ideas that separated GM from the pack.”

Matt:  “Under Sloan, GM operated differently than other car companies?”

Jordan:  “Very much so.  GM set a new standard.  The ideas applied to car companies and most other manufacturing companies.  And the ideas are still relevant today.”

Matt:  “I’m anxious to hear more but is the story going to get too complicated for people to understand?  We have to keep the story out of the weeds and make sure it is understandable.”

Jordan:  “The topics might seem a bit deep at times.  But this is not a story told in sound bites.  Success does not come with slogans and talking heads…despite what some people think.”

Matt:  “Alright but really try to KISS – keep it simple, stupid.”

Jordan:  “In my estimation, Sloan’s three major contributions were: (i) implementing understandable financial controls (ii) clearly separating GM’s different products (iii) separating strategic and operational decisions.”

Matt:  “I sort of understand financial controls and separating products.   Separating strategic and operational decisions is a bit more abstract.”

Jordan:  “OK, let take these one at a time, starting with financial controls.”

Matt:  “Are you talking about say authority to write checks and keep accurate books?”

Jordan:  “Yes, but there is much more.  What is hard to understand now with computers, electronic databases and scanning equipment is companies were run using information written on index cards and hand-written ledgers.”

Matt:  “That is hard to imagine.”

Jordan:  “Imagine this – and I think the date is about right – until the mid-1920’s Ford Motor Company operated without any real accounting system.”

Matt:  “Ford had become a huge company by then…and no real accounting system?”

Jordan:  “GM before Sloan was similar.  But Sloan brings systems thinking.  Systems for accounting, systems for cash management and systems for forecasting production.”

Matt:  “What you’re saying is GM went from shoe-box accounting to at least reconciling bank statements and creating a budget.”

Jordan:  “In very simple terms, yes.  However, it is hard to overstate the importance of the discipline Sloan began instilling in the company.”

Matt:  “Wasn’t it just an accounting system?”

Jordan:  “No, it was creating a culture of being accountable.  Having a system in place allowed performance to be measured.”

Matt:  “You’re saying the measurement system – production, cost, etc. – allowed measurement of the performance of individuals and groups.  And the measurement made them more accountable.”

Jordan:  “Exactly.  Individuals and groups began to understand what needed to be accomplished and how well they performed.”

Matt:  “Have a specific example?”

Jordan:  “Yes, and I hope it is not too abstract.  But I think critically important to GM’s success.”

Matt:  “What is it?”

Jordan:  “Budgeting is critical in the auto industry…and any industry with high fixed costs.  The company must generate enough sales to pay for all the fixed cost before it begins earning a profit.”

Matt:  “Like the sales person on full commission.  He or she needs to sell a certain amount just to cover expenses – mortgage, utilities, groceries, car payment, fuel.  Then sell some more just to have some spending money.”

Jordan:  “Good example.  And the higher the mortgage payment and car payment, the more the person has to sell.”

Matt:  “But the sales person never knows how much will be sold, and therefore never knows what the commission check will be.”

Jordan:  “Car companies face the same problem.  When the economy is good, people have more money and buy more cars.  When the economy is not so good, people put off buying a new car and sales fall.”

Matt:  “What was so innovative about what Sloan did?”

Jordan:  “Sloan created a budgeting procedure such that GM broke even profit wise at 70% of its capacity.”

Matt:  “So if the company had capacity to sell 1,000,000 cars for a certain year and sales were only 700,000 cars for that year, GM would break even…really, not lose money?  That idea seems so simple.”

Jordan:  “The idea is incredibly simple but very hard to execute.  Forcing the execution helped create a culture of the importance of managing costs.”

Matt:  “So budgets were built around 70% of capacity.  Still not sure if I understand the significance.  And does the process have a name?”

Jordan:  “The budget was called a ‘standard-volume budget.’  Focusing on ‘standard volume” helped people form a discipline of controlling costs.  Early in my career I was assigned to coordinate the budget process for Cadillac.  The budgeting process was not easy and not very pretty.  A lot of negotiating, arm twisting and cajoling.  By the end everyone involved understood the importance of controlling costs.”

Matt:  “Obviously left quite an impact on you.  What’s the second point?”

Jordan:  “All sales above 70% of capacity were very profitable…and I mean very profitable.”

Matt:  “How often did sales fall below 70% of capacity?”

GM,_logoJordan:  “Not very often, even in the Depression.  In fact, GM made money every year from the early 1920’s and throughout the Depression.”

Matt:  “You’re kidding?”

Jordan:  “GM made money while many car companies went out of business.  Duesenberg, Cord, Auburn just to name a few.”

Matt:  “So how many years in a row was GM profitable?”

Jordan:  “70+ years.  From the early 1920’s to the early 1990’s.”

Matt:  “What a run.  What happened?”

Jordan:  “This is a good time to take a break.  Sloan implemented a couple more key ideas that made the 70-year string possible…and the string should still be going on.  We can talk about what went wrong after we talk about what went right.  Let’s take a break.”

 

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